The Davis Tax Review Committee believes that the proposed carbon tax be introduced with an initial zero liability from 2017 to allow for the system to be tested, for more data to be collected and for initial teething problems to be addressed.

This contrasts with the Treasury's proposal in the draft Carbon Tax Bill released for public comment earlier this week that the first tax will be levied on emissions produced during the period commencing January 1, 2017.

The committee considers that the "manifest uncertainties" around key aspects of the proposed tax require that it be implemented even more gradually than Treasury proposes. It said in its interim report on the carbon tax released Friday for public comment by January 31, that a zero liability system would allow for problems of reporting to be addressed and assist in the gathering of relevant data which is vital for a proper assessment of the proposals. The impact of the tax on employment, the economy and on government revenue needed to be thoroughly analysed, the committee said.

More information was needed for example on the total revenue that could be expected from the tax under different scenarios. "No tax, holding such important implications, can be introduced without a rigorous analysis of its fiscal consequences, particularly concerning the burden that is likely to fall upon those least able to shoulder a further tax load," it stressed.

Treasury has stated that the proposed tax has been designed to be revenue neutral in the initial phase. It has proposed a basic 60% tax-free threshold during the first phase of the carbon tax, from implementation date up to 2020 with additional tax free allowances for specific sectors. Tax-free thresholds will be capped at 95%. Taking into account the tax-free thresholds, the effective carbon tax rate will vary between R6 and R48 per ton CO2e (carbon dioxide equivalent) and the tax will be imposed on only 5 to 40% of actual emissions in the initial period.

But the committee argues that a zero liability system would provide the data for rigorous modelling to test "the potentially regressive effects and recycling options, as well as the implications for employment and the concomitant development of solutions to circumvent these potential problems," the committee's said in its report which was submitted to Finance Minister Nhlanhla Nene last month.

"Without a well-defined assessment of the revenue which will be raised from such a tax, it is impossible to assess these fiscal effects. It is imperative that Treasury indicates more accurately what revenue is expected to be generated from a carbon tax before implementing it and also how the burden of the tax will be shifted away from the poorer segments of society, so that it does not have significant retrogressive consequences."

The committee recommended that the threshold for the tax be set to 100% for the first year. This would mean that firms producing scope one emissions (that is emissions that result directly from fuel combustion and gasification and from non-energy industrial processes) would be required to comply and submit returns but would not incur any tax liability in the first tax year after implementation.

"Such an option would provide companies with the necessary data to plan more effectively, allow SARS to fine-tune tax reporting systems and provide National Treasury with additional information to allow for more accurate modelling and revenue forecasting. It would also assist government in developing and testing the necessary administrative systems."

Uncertainties included how industry could promote carbon efficiency improvements. The committee also noted that the carbon offsets market was immature and needed time to develop.

"Confusion exists in the market as to whether penalties will be applied to firms exceeding proposed carbon budgets from 2020. While carbon budgets are important in assisting the setting of carbon tax policy, the imposition of penalties is a command-and-control procedure is at odds with the economic principles of a market-based carbon tax," the committee's report noted.

Also a more detailed analysis of revenue recycling was needed to fully understand the distributional effects of the carbon tax as well as its impact on employment, the balance of payments, exchange rates, inflation and fuel, transport and electricity prices. The extent of the proposed changes to the fuel levy to account for CO2 emissions from transportation was also required as well as an analysis of the likely size of double taxation where there were existing levies.

Despite its reservations the Davis Tax Review Committee viewed Treasury's carbon tax policy proposal and draft carbon tax bill as "commendable schemes to drive a shift to a low carbon intensity economy. Their various elements are designed to protect industries against competition shocks, trade exposure and sector specific disadvantages in the short term through allowances and the use of offsets."

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